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How to Project Status Without Saying a Word

A version of Edvard Munch’s “The Scream,” shown above, sold at Sotheby’s last night for $119.9 million, the most ever paid for an artwork at auction, according to The New York Times News Service. This purchase price surpassed the amounts paid in other recent high-profile sales such as the $104.3 million spent on the Giacometti bronze “Walking Man I” at Sotheby’s in London in 2010, the $106.5 million paid for Picasso’s “Nude, Green Leaves and Bust” at Christie’s in New York a few months later, and the $104.1 million spent at Sotheby’s New York in 2004 on “Boy With a Pipe (The Young Apprentice),” also by Picasso. Five bidders competed for “The Scream,” which Sotheby’s had estimated would bring a mere $80 million.

Munch made four versions of the work, three of which are held in Norwegian museums. The version that sold yesterday, a pastel on board from 1895, was the only one still in private hands. According to Munch (from here), his inspiration for the painting came as follows. “I was walking down the road with two friends when the sun set; suddenly, the sky turned as red as blood. I stopped and leaned against the fence, feeling unspeakably tired. Tongues of fire and blood stretched over the bluish black fjord. My friends went on walking, while I lagged behind, shivering with fear. Then I heard the enormous, infinite scream of nature.” He later described (from here) the personal anguish behind the painting: “for several years I was almost mad… You know my picture, ‘The Scream?’ I was stretched to the limit—nature was screaming in my blood… After that I gave up hope ever of being able to love again.”

According to Forbes, while the purchase price was the highest ever paid nominally, it is “only” the 8th most expensive painting (actually a pastel on board) sold at a private or public auction when prices are adjusted for inflation. However, it is not the most expensive painting (or pastel on board) ever sold. That (dubious?) honor goes to Cezanne’s “The Card Players,” pictured below, which, according to Vanity Fair, was purchased by the nation of Qatar last year for more than $250 million.

There are any number of potential lessons provided by this story, even beyond the obvious — that some people have an awful lot of money to throw around. One is that price and value are two different things. Price is what a willing buyer will pay a willing seller. In this case, the price was $119.9 million. Value, on the other hand, exists independently of price, and reflects what something is intrinsically worth. If price and value were the same thing, we wouldn’t have markets. Even if I had the money, I can’t imagine paying anything like the prices described above, no matter how remarkable the work (even though I recognize that my value judgment may be wrong).

Secondly, this sale provides some insight into human nature. Almost all of us want to be rich. If we are rich, we want people to know that we’re rich. It’s generally impolite to broadcast one’s wealth (the winning bidder has remained anonymous thus far, probably due to security concerns too), but one can make the same point in more subtle ways (even if not all that subtle). One can buy a famous painting, for example. When people see it hanging in one’s home (mansion) or hanging in a museum with a display indicating who loaned it, the desired message is transmitted. I don’t mean to suggest that there can never be a philanthropic motive behind actions like endowing university buildings or even buying stuff at charity auctions. But we all like to be recognized as good, rich, successful, smart, etc., and we can be pretty creative in trying to make the point when we don’t want to be too overt. The expressive and emotional benefits to be gained via status are very important to us (as Meir Statman points out in his terrific What Investors Really Want).

That’s a key reason why I think hedge fund investing is so popular. Despite early success (when the space was much less crowded), hedge funds haven’t performed very well for investors overall despite enormous fees. Simon Lack, former head of J.P. Morgan’s hedge fund seeding operations and author of the book The Hedge Fund Mirage, has shown that hedge funds have provided dismal returns overall (Lack disputes a recent industry study designed to challenge Lack’s research and allegedly showing better results here, more here). “Hedge funds have made tremendous amounts of money, but it hasn’t made its way back to the clients. In fact, if all of the money that’s ever been invested in hedge funds over the history of the industry had been invested in treasury bills instead, the results would have been twice as good.” Yet lots of new funds continue to be formed and money continues to pour into the sector ($6.8 billion in February despite performance that lagged the S&P 500 that month by 180 bp).

Imagine you’re at a cocktail party and you want to impress the people around you. One way is to be witty, charming and a good conversationalist, but not everyone can do that effectively. However, it’s easy to let it slip that you’re “invested with XYZ Hedge Fund.” That one sentence provides instant cachet and status, the aura of success. For many, the ability to utter such a sentence is worth lousy returns.

Price and value can be very different things.

NOTE: You can win a Kindle commenting on this post. I am giving away a Kindle a week in May — four overall.

5 thoughts on “How to Project Status Without Saying a Word”

Nice piece! Intrinsic value and extrinsic value plays a huge role in the way we commensurate items with a monetary value. I think Intrinsic values plays a greater role and sometimes we don’t realize how much it interacts with our daily lives so often. While extrinsic value is more easily formulated and it is true that intrinsic value is more subjective, intrinsic value can be something unfathomable to others. More than often, I find myself questioning my family’s choice in furniture or other items relative to the price in context to the market. But, in the end, I always go with their choice because their happiness is worth more to them and my happiness relies on less stress. We both place a great intrinsic value on our own version of happiness that exceeds the extrinsic value’s benefit. While I look at a Macy’s furniture saying the value is inflated over other furniture stores, the level of stress in persuading my family that any monetary based reason to choose furniture is a good reason not to buy Macy’s does not out weight the pushback and stress I would receive. But, in the end, it is worth it when they are happily sleeping on a bed or sitting on a sofa they can show off to others that it is the new “fashionable” thing. Those values we place, “fashion”, happiness, less stress, often play a greater role in how we invest and the decisions we make than we realize.

“Price is what you pay; value is what you get.” — attributed by W. Buffet to Benjamin Graham (Berkshire Hathaway Annual Letter to Shareholders, 2008)

While this helps explain private investors’ stakes in hedge funds, I am guessing the vast majority of money in hedge funds belongs to institutions, especially pension funds. Putting aside David Swenson’s philosophy regarding alternative assets, the reasons for pension funds to put money into hedge funds are complex and often driven by unrealistic hopes of hitting homeruns because of inflated returns expectations and undercontribution – but that still does not make it prudent or rational. Not everyone can be David Swenson.

You point is a good one about institutional investment in hedge funds. I would add an additional component, however. The institutions (and even more so the consultants they employ) want to be seen as “at the forefront” for marketing purposes and face career risk if they are seen as behind,

With respect to Swensen — much is skill (and I agree — not everyone can be him), but access plays a big part too.

But access is not all-important, and not necessarily important at all. Walter Schloss never had or wanted access to management or investments, preferring to sit in his office and pore over financials (with his son) all day long. Yet he outperformed almost all managers. In fact, the thousands of Wall Street sell-side analysts have enviable access to management and due diligence resources, and you would probably become rich pulling a Costanza and betting exactly opposite of their calls.

So not to discount how Swenson does it (and you are probably right on that) — I’d just like to reinforce that there is hope for individual investors out there with merely an HP and a Value Line subscription (or library card).